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Understanding Construction Loans In 2019

Written By: Travis Carter : Construction loans

 

Construction loans have grown in popularity due to inventory shortages across the country. Getting approved for a new construction home loan is easier than most banks make it seem.
 
Learn how to finance new construction with no money down and understand the credit requirements to get started.  There are some extra steps involved in new construction loans but knowing this, you can make the process easy. The reward of building your dream home far outweighs any challenges you will face during the construction process.
 
Keep reading to learn how to build a home with no money down. We lend in all 50 states

Step 1 - Get Prequalified

The first step in obtaining a new construction loan is much like any other mortgage. You will need to get pre-approved.
 
When applying for a construction loan, the amount you will qualify for is slightly less than a standard mortgage approval. This is because of cost overruns.
 
Cost overruns are funds held by the bank in case the cost to build your home exceeds the initial estimates. It is common in construction to make minor changes once the home is under construction. Examples include countertop material, flooring choices, or better appliances.  Small changes can change the cost significantly.
 
The cost overrun amount means you will need to borrow more than the actual cost to build. If you do not need to use the cost overruns, it is refunded at closing. The refund lowers the final loan amount you will pay back. 
 
If you are pre-approved for $200,000 to purchase an existing home, your mortgage approval for a new build would be $200,000 less any cost overruns required by the bank.
 
To learn more about the standard pre-approval process make sure you read prequalification vs Pre-approval. 

Step 2 - Apply For a Construction Loan

Applying for a construction loan is easy. Make your loan officer aware that you are applying for a construction loan and confirm that the bank offers a construction loan program. Ask about the minimum down payment requirements to make sure they have a loan program that works for you.
 
 Prepare your income documents in advance so you are fully prepared to proved any requested documentation. Gather your most recent 2 paystubs and the most recent w2 form you have received. If you are self-employed, make sure you have two years of complete tax returns. If you receive retirement, pension, or disability, gather your award letters. An award letter is a letter mailed to you annually that tells you how much money you will receive every month. If you have any issues finding your documents, discuss this with your loan officer. Many times the construction loan officer can help you request the documents that you need. 
 
Have your personal information ready including social security numbers, dates of birth, and address history. If you are well prepared to apply for a Construction loan, you could have approval in as little as 24 hours. 
 

Step 3 - Choose a Builder

Finding a builder may seem easy but in reality, there are other considerations required. Most construction lending banks require that the builder is approved by them. The builder approval process includes reviewing the contractor’s financials, evidence of insurance, and in some cases references. 
 
The good news is that a reputable bank should already have a handful of approved builders in your area. If you choose a builder that is not approved just prepare the builder for the approval process.
 
The builder approval is done to protect you. In the early years of construction loans I ran into a few cases where a builder, considered to be reputable by the homeowner, was nowhere to be found once they received the first money disbursement. A common unethical practice in construction is to use funds from a different transaction to finish an existing new build. The bank will make sure you don’t have any of these issues by underwriting the builder as if they too are borrowing money. 
 
The best practice is to request a list of approved builders from your construction lender. If you have a home in mind, discuss the cost to build with the approved contractors. In addition, ask for references or read reviews to make sure you are making the best contractor choice. The bank typically has intimate knowledge of the contractor’s projects and may be able to help guide you through the process. 

What is the required down payment on a Construction loan?

Contrary to popular belief, a “no money down” construction loan is available. Not everyone will qualify for a “no money down” home loan but low down payment construction loans are also available.
 
Calculating the down payment amount on new construction requires knowing if you currently own the land, if you are buying new land, or if the land is being gifted to you by a friend or relative

Buying New Land

Calculating the down payment when you are buying new land is the most simple calculation. FHA requires a down payment of 3.5%. To calculate the down payment on an FHA loan you must first determine the cost to build. The cost to build is defined as construction costs plus land cost plus 5% (The estimate for cost overruns). The required down payment is 3.5% of the total cost to build. 
 
As an example, let’s assume the land cost is $20,000 and the construction cost is $180,000. In this case the cost is $200,000 plus $10,000 for overruns. The total down payment would be $7,350. Or 5% of $210,000. Making preliminary inquiries into the cost of construction is important to prepare for the estimated down payment. 

 

Owned Land

If you already own the land, I have some good news. You don’t need a down payment. The required down payment can be the land! You might not need money out of pocket at all! Using the same example as above, let’s assume the land is owned. In this example,  you can borrow up to $202,650 with no money out of pocket! The down payment is the land you already own. 
 
If you own the land already, the construction lender will order the appraisal to determine the value of the land. The land value can be used towards the down payment. Similarly, if you have a loan on the land you simply subtract the amount owed from the value. The difference can be used towards the down payment. 

Gifted Land

If you are fortunate enough to have a relative willing to gift you land, the value of the land can be used towards the down payment. unfortunately gifted land cannot come from a friend or acquaintance. Government construction loan programs have very specific guidelines about where a gift can come from. It must be from a relative. 
 
So now you know about how down payments are calculated on a construction loan. let’s talk about loan program options. 

The three primary loan types available for new construction are FHA, Fannie Mae, USDA, and VA construction loans.

 

Continued Below

About Me

Travis Carter PLattsburgh Mortgage

Travis Carter – Branch Manager

I have been in the mortgage business for over 18 years. Since joining my first mortgage company in 2000, I have focused on providing a better mortgage experience. I have managed and trained 30+ mortgage professionals since starting my career. I specialize in first time homebuyer loans including FHA, VA, USDA, and Conventional financing. My goal is to never stop learning and test new financial strategies so I can pass this knowledge on to my clients.

If you have questions or would like to apply for a first time homebuyer loan, I can be reached at travis@plattsburghmortgage.com 

Get Qualified

Construction Loan Inquiry

FHA Construction Loans

FHA construction loans are the most popularly used construction loans. FHA requires a 3.5% down payment and low interest rates. FHA requires an upfront mortgage insurance premium to be paid at closing. The mortgage insurance can be financed in the loan and will not result in additional out of pocket expenses.

FHA will allow 6% builder paid closing costs. If the construction contract is written to include builder paid closing costs, you will not need to pay for closing costs out of pocket. 

VA Construction Loans

VA construction loans are available to veterans that meet certain length of service requirements or active duty veterans. VA allows is a no money down loan whether you own the land, are buying the land, or the land is being gifted.
 
VA has the lowest interest rates and no monthly mortgage insurance payments. VA has the lowest monthly payment compared to all other construction loan options available. If you are a veteran, the VA construction loan is the best option for you. 
 
VA requires an upfront funding fee to be paid at closing. The funding fee canbe as high as 3.15%, however, the fee can be financed into the loan. You will not need to increase the amount of the down payment. VA is a true no money down construction loan. 
 
Builder concessions are allowed with a VA loan. The concessions mean that the builder can pay your closing costs.  If you do not have enough money to pay your closing costs,  you will need to negotiate builder concession in the construction contract.
 
To receive a free construction loan quote, click here. We will provide closing cost estimates and down payment requirements for your new construction home loan. 

Conventional Construction Loans

Conventional construction loans are the most commonly offered construction loan program. Conventional loans require a larger down payment than the Government backed home loan options. Typically 20% down is required to close on a Conventional construction loan. Although the loan terms of a Conventional loan can be great, it is not a popular choice among first time home buyers. 

The down payment on a Conventional loan is calculated like the FHA or VA home loan options. Gifted land and owned land can be used towards a down payment, however, if the value of the land does not exceed 20% of the total cost to build, you will be required to bring money to closing. 

To contact us and discuss your construction loan options, give us a call at (518) 324-5544

WHat are the requirements for a construction loan?

The credit score required for a new construction loan is different than a standard home purchase. Most banks have “Overlays” that require a higher credit score beyond the loan programs minimum score requirements.

The Plattsburgh Mortgage team can finance a new construction loan with a credit score as low as 640. We offer construction loans in all 50 states. Our most common areas for new construction are South Carolina, North Carolina, Florida, Virginia, Maryland, Delaware, New Hampshire, Massachusetts, New York, Vermont, Maine, Pennsylvania, and Rhode Island. 

Our lending team has intimate knowledge on constructing lending in your area. 

The Construction Appraisal

An appraisal is required when applying for a new construction home loan is a “to be built” appraisal. The appraiser reviews building plans and estimates the future value of the home once it is constructed. A construction appraisal is slightly more expensive than a standard mortgage appraisal. The average cost of a construction appraisal is $600 vs $415 for a standard mortgage appraisal. 
 
An appraisal is a tool used by lenders to determine how much money you can borrow for your new home purchase. If the value is less than the sales price the needed down payment can increase.
 
Typically new construction appraisals match or exceed the total cost to build but there are unique situations where the home appraises for less than is needed. 
 
To offset the risk of paying for the appraisal if the value could be an issue, discuss your plans with a lender. The construction lender will have intimate knowledge of the markets they lend in. They can share their experiences financing new construction and help you prepare to build your new home. 
 

How Long does it take to get approved for a Construction loan?

Construction loan take more time than a standard loan to get approved. On average, a construction loan takes 60 to approve. he construction loan takes longer to approve because the bank is underwriting a builder, property, and the borrower. 

Conclusion

In summary, construction loans are available in 2019 and you do not need a large down payment to start construction. Inventory shortages across the country have resulted in construction loans growing in popularity. You can finance your dream home by applying for one of our construction loan programs and help grow our countries housing inventory in the process.
 
Bank of England offers new construction loans for first time home buyers. We offer no money down construction loans and low down payment options. Bank of England has flexible credit requirements and a “full service” staff prepared to guide you through the new construction process.

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